ReturnNewshttp://return.pk
| Financial News, Economy News, Business & Industry News, Market News, CPEC News, Tax NewsMon, 19 Nov 2018 07:20:50 +0000en-GBhourly1https://wordpress.org/?v=4.9.8http://return.pk/wp-content/uploads/2018/05/cropped-Webp.net-resizeimage-32x32.pngReturnNewshttp://return.pk
3232Daronomics and its aftershockshttp://return.pk/2018/11/19/daronomics-and-its-aftershocks/
Mon, 19 Nov 2018 07:20:50 +0000http://return.pk/?p=14133The former Finance Minister Ishaq Dar has finally come out to share his side of the story on what went wrong with the economy. This is probably the first time a former FM has taken responsibility for his government’s failures. His article published in The News on 29th October titled ‘Facts about Public Debt’ states that […]

The former Finance Minister Ishaq Dar has finally come out to share his side of the story on what went wrong with the economy. This is probably the first time a former FM has taken responsibility for his government’s failures. His article published in The News on 29th October titled ‘Facts about Public Debt’ states that ‘PM Abbasi and his economic team were faced with huge unbudgeted financial demands’ in the lead up to the 2018 elections and consequently ‘economic discipline could no longer be maintained’.

The ‘huge’ financial demands could be seen in the ‘unfortunate’ build up in debt according to FM Dar. Total public debt during the year FY18 increased by a record Rs. 3.4 trillion, out of which Rs 2 trillion was foreign loans. This does not include the debt piled on by the loss-making public sector enterprises. According to FM Dar, if this slippage had not taken place in the last year of the PML-N government, the economy would not be racing towards another financial crisis.

In this narrative, poor Miftah Ismail comes out as the inexperienced, incompetent replacement FM holding the smoking gun. In particular, FM Dar took strong exception to the reversal in the key policy anchor of his regime, i.e. the USD / PKR fixed peg. Under Miftah’s regime, this policy was reversed and rupee depreciated 23% to 128 (from 104) ahead of the 25th July 2018 General Elections. The rupee depreciation added significantly to the external debt obligations as a percentage of Government revenues.

Perhaps FM Dar feels that the crisis could have been averted if the elections had been held in 2017 following PM Nawaz Sharif’s disqualification by the SC. However, it is unfair to lay the blame squarely on the shoulders of Miftah Ismail. Most independent experts had been warning about the looming financial crisis much before Miftah took office.

The financial crunch is felt most severely in three key areas of the economy. First and most severe is the Balance of Payment crisis with Pakistan running out of FX reserves to cover its imports and to pay back the external loans. The second and equally severe is the inability of the Government to fund its unsustainable fiscal spending with tax collection barely covering loan repayments and running of government. The third crisis that has resurfaced is the record losses of the Power companies and the build-up of the large circular debt in the energy supply chain.

The source of the balance of payment crisis this time around is the collapse in exports and large debt repayments due in the next one years. Under the PML-N government, exports had collapsed to $20bn by 2016, down from $25bn in 2013. This was the longest and sharpest decline in exports recorded in Pakistan’s history.

During the same time, period exports from Bangladesh jumped from $26bn to $35bn. The decline in exports was a direct result of the rising cost of doing business, with Pakistan’s ranking plummeting to 147 in 2018 (from 107 in 2013).

Alarm bells had started ringing and Dr Hafiz Pasha’s article titled ‘Balance of Payment Emergency’ in September 2017 stated that ‘SBP FX reserves are now below safe levels’ of 3 months of import cover. The gap between foreign income (exports + remittances) and the import bill was an ‘unsustainable $1bn a month’ according to Dr Pasha. In its first post-program monitoring report the IMF staff warned that SBP FX reserves (net of short-term liabilities) at the end of 2017 had declined to a negative $724 million, down from $7.5 billion at the end of the IMF program in September 2016.

This was also visible in the panic in the markets. KSE 100 index fell 29% to 37,919 points by 19th December 2017, from a peak of 52,876 points in May 2017. Urgent economic measures were needed to stabilize the economy and calm the markets. In December 2017, SBP started to raise interest rates and allow the rupee to depreciate in an attempt to reduce the rising trade deficit. This move should have been complemented by measures to contain the government’s fiscal deficit. However, unfortunately, the PML-N government was desperate to win the 2018 elections regardless of the cost to the economy. We saw a significant increase in pre-election spending that led to a record fiscal deficit of Rs2.3 trillion (6.8% of GDP) in FY18.

The third crisis on the PSEs has also become severe with the entire energy supply chain clogged due to the circular debt. During the same period as expensive new power projects set up by the PML-N government started to come online in 2017, power generation picked up but the cost of production started to escalate. With no improvement in Transmission & Distribution losses, the circular debt in the energy supply chain spiralled out of control. By end of June 2018, the circular debt had skyrocketed to Rs 1.2 trillion, compared to Rs 480 billion when the PML-N government took office in 2013.

The financial crisis inherited by Prime Minister Imran Khan-led PTI government is severe and the aftershocks of the crisis will stay in the economy for a long time. There is no one better qualified to talk of this crisis than FM Dar, whose policies have brought the economy to the edge. And this is not the first time too. His previous PML-N government of 1999 also left Pakistan in a similar mess. Back then Pakistan was forced to restructure debt (technical default) and freeze foreign currency accounts. Forward to 2018 and once again Pakistan is forced to seek extraordinary financial assistance from Saudi Arabia and other friendly countries to avoid a default.

(This news/article originally appeared in PakistanToday on November 19th, 2018)

]]>The IMF comes a callinghttp://return.pk/2018/11/19/the-imf-comes-a-calling/
Mon, 19 Nov 2018 06:55:39 +0000http://return.pk/?p=14131The International Monetary Fund (IMF) mission arrived in Pakistan on 7 November and is still in the country with scheduled departure on 22 November. The objective of the mission: to discuss the modalities (pre-programme conditions as well as during programme conditionalities) and in the event that a staff level agreement is reached it would be […]

The International Monetary Fund (IMF) mission arrived in Pakistan on 7 November and is still in the country with scheduled departure on 22 November. The objective of the mission: to discuss the modalities (pre-programme conditions as well as during programme conditionalities) and in the event that a staff level agreement is reached it would be announced in a joint press conference between the mission leader and the Finance Minister Asad Umar as per past precedence.

Gerry Rice Director Communications Department International Monetary Fund (IMF) stated at IMF headquarters in Washington DC on 1 November 2018: “On October 11, during our Annual Meetings in Indonesia, Pakistan’s Finance Minister made a formal request for financial assistance from the IMF. And, of course, the objectives of that program to help stabilize the Pakistan economy, put in place the preconditions for sustained inclusive growth, and modalities of that would be announced once we’ve reached a staff level agreement. And then the usual process, once the staff level agreement is reached, then we’ll go forward to our Board for the formal approval of the program. There will be, again as usual…a press release, there will be a communication at the end of that. Assuming staff level agreement is reached, there would be a communication at that point”. This statement leads to an obvious conclusion: that the exact amount of the bail-out package would not determine the conditions that the Fund would insist on; sadly this was not the case with Prime Minister Imran Khan and Finance Minister Asad Umar, who consistently maintain that as the country’s immediate external financing requirements have been met by pledges made by friendly countries therefore the funding request from the Fund would be minimal and hence the associated conditions would not be as harsh. The two men must have realised by now that the amount of the bailout package is not relevant to the conditions that the Fund may insist on which start off with policies designed towards achieving stabilisation (defined as strengthening the reserve position and reducing the current account deficit to sustainable levels) to be followed by policies designed to achieve sustained inclusive growth.

The current visit of the IMF is the second time since the Pakistan Tehreek-e-Insaf government assumed power. The first mission dates were from 27 September to 4 October and the objective, as per IMF website, was to “discuss Pakistan’s economic situation and exchange views on necessary policies for economic stabilization and sustainable inclusive growth.” Harald Finger, the mission leader, made a statement uploaded on the IMF website that can be split into two parts. First the pat on the back: “the team welcomes the policy measures implemented since last December. These include 18 percent cumulative depreciation of the rupee, interest rate increases of cumulatively 275 bps, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost recovery levels, and the proposed increase in electricity tariffs. These measures are necessary steps that go in the right direction.” These measures were proposed by the IMF mission in December last year and implemented up to a degree by the previous administration (though with the elections scheduled for 28 July political considerations outweighed economic considerations) as well as by the incumbent government.

And then the IMF’s sharp slap on the wrist, “additional decisive policy action, anchored in a comprehensive strategy, and significant external financing will be needed in the near term. Policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment anchored in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs. Together, these steps would help reduce current account pressures and improve debt sustainability. Importantly, to protect the more vulnerable segments of society, there is a need to further strengthen social protection through the Benazir Income Support Program. These policies will help stabilize the economy and lay the foundations for sustainable and inclusive growth.”

The mission further added that “once stabilization is beginning to take hold, the focus should increasingly shift to reforms to foster sustained and inclusive growth and strengthen key institutions. Priority areas include modernizing the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance and eliminating losses of public enterprises, enhancing the SBP’s autonomy, intensifying AML/CFT efforts, improving the business climate and anti-corruption efforts, and fostering the economic inclusion of the poor, youth, and women.”

Five likely conditions for a bailout package can be gleaned from the press release dated 1 November: (i) a further increase in electricity and gas tariffs. The government may claim, like its predecessor, that the need to raise rates to achieve full cost recovery will decline as theft, distribution and line losses are dealt with and sector governance improves but the IMF has heard this refrain before and may add the clause that in the event that governance does not improve the rates would rise; (ii) depreciation would continue till the currency’s market value is achieved however this is unlikely to be more than 140 rupees to the dollar given that the rupee has depreciated in value considerably since December; (iii) increasing revenue. While Asad Umer’s claim that revenue would rise by 92 billion rupees through greater use of ‘technical’ factors (a claim made in the supplementary budget) may not be overtly challenged yet the Fund would add the clause that in the event that this does not happen, taxes would be raised and, given the focus on stabilization, taxes raised would be on existing tax payers, the easiest to collect, rather than on widening the tax net. Umer would be well advised to take precautionary measures to ensure that the projected revenue from the recent raise in regulatory duties on non-essential imports must include better policing across our huge porous borders; and the Fund is also likely to insist on a major privatization programme rather than the small 35 entities targeted for privatization according to the Privatization Commission’s website; (iv) expenditure would have to be curtailed and the practice so far has been to slash development expenditure with a consequent negative impact on growth, a practice that apparently continued in Umer’s supplementary budget. A more appropriate policy would be to curtail two major items of current expenditure – allocation on civil administration increased by close to 100 percent during the past five years (from 215 billion rupees in 2011-12 to 402 billion rupees in 2017-18) and military outlay rose from 510 billion rupees in 2011-12 to 999 billion rupees in 2017-18). While the operation against terrorism was critical to provide security to the people, any government’s primary responsibility, yet terrorism has been brought under control by now. Given that the state of the economy merits sacrifices from all sectors and all people one would hope that a freeze on allocations for the next two to three years is agreed with the civil and military establishment; and (v) end the reliance on borrowing from the State Bank of Pakistan, and raise rates (which is likely to be supported). During the current fiscal year the government has already borrowed over 2 trillion rupees from the SBP and the IMF would insist this be stopped immediately.

Once stabilisation is achieved, the IMF would then focus on growth policies. However, in this context, it is relevant to note that Pakistani governments get complacent once stabilization is achieved and have not followed through with structural reforms particularly in the tax and power sectors. Umer is on record as having stated that he supports withholding taxes but he needs to understand that the bulk of these taxes are in the sales tax mode (on services and products) and not in the income tax mode which implies that the filers (though charged less than the non-filers) are paying a tax on their income and then again when procuring the service/item that is taxed. One would hope that this time around the tax structure is reformed. Likewise the power sector’s governance has been appalling and this in spite of the previous government’s attempt to eliminate the circular debt, reduce theft and distribution and transmission losses. In short the challenge to reforms would be considerable and the Khan administration must not assume it will succeed where others failed.

Finally, the Khan administration is focused on a social sector programme which has two major flaws. First, social subjects were devolved to the provinces and hence the centre has a limited role to play in this regard. The federal government must stop financing these ministries and instead dissolve them thereby compelling the provinces to enhance capacity as per the requirements of the National Finance Commission award. And secondly, there is a need to amalgamate poverty alleviating programmes, including house building for the poor, into the Benazir Income Support programme (BISP) which has identified the vulnerable and which is supported by multilaterals. Let not Imran Khan display the same reticence as the PML-N administration in making this a national flagship project because of its name.

To conclude, much would have to be agreed with the Fund which is against the manifesto promises of the incumbent government. And irrespective of the Saudi or Chinese or any other package to reestablish our bona fides in the international community as a prelude to fuel exports (our friendly countries sadly account for very little of our annual export earnings) the IMF package is a necessity.

(This news/article originally appeared in Business Recorder on November 19th, 2018)

]]>Drop in FDIhttp://return.pk/2018/11/19/drop-in-fdi/
Mon, 19 Nov 2018 06:51:49 +0000http://return.pk/?p=14129The data on foreign direct investment (FDI) during the current year is highly depressing. According to latest figures released by the State Bank, Pakistan fetched FDI amounting to just dollar 601 million during July-October, 2018 as compared to dollar 1.12 billion in the corresponding period of last year, showing a decline of dollar 519 million […]

The data on foreign direct investment (FDI) during the current year is highly depressing. According to latest figures released by the State Bank, Pakistan fetched FDI amounting to just dollar 601 million during July-October, 2018 as compared to dollar 1.12 billion in the corresponding period of last year, showing a decline of dollar 519 million or 46 percent. The inflow of portfolio investment also stood negative at dollar 296.5 million, down by 371 percent in the first four months of the current fiscal year. Similarly, total foreign investments, comprising FDI, portfolio investment and foreign public investment also plunged to dollar 331.3 million in July-October, 2018 compared to about dollar 1 billion in the same period of FY18 showing a huge decline of dollar 682 million. Surprisingly, inflows from China also totalled a mere dollar 335 million as compared to dollar 694.3 million in July-October, 2017 despite China-Pakistan Economic Corridor (CPEC)-related investments. Significant inflows were also recorded from the UK (dollar 64.5 million), the US (dollar 45 million), South Korea (dollar 43.9 million) and Switzerland (dollar 36.3 million). Month-on-month basis, inflows in October, 2018 were also significantly lower at dollar 161 million compared to dollar 345.6 million in the same month last year; a fall of 53.4 percent.

The huge fall in FDI during the current fiscal is of course a very bad news for the country and shows very clearly that Pakistan has lost attraction as a favourable destination for foreign investment lock, stock and barrel. During FY08, the country had received FDI amounting to dollar 5.41 billion which has been declining steadily since then. If the present trend continues, FDI during the current year cannot be more than dollar 2 billion. The continuous downward trend does not only indicate a negative perception of the country among foreign investors but is also disturbing for country’s policymakers who were expecting the FDI to revive growth prospects of the economy, create job opportunities, and modernise the industrial base to enhance competitiveness of exports and bridge the wide gap in the external sector. However, the policymakers need not be very much concerned about substantial outflow of portfolio investment. Such an investment tends to leave the country very quickly and cause excessive fluctuations in the exchange rate of the rupee without making much difference on the productivity of the economy.

A slump in FDI could be attributed to a number of factors. It looks that foreign investors are avoiding the country due to political instability, bureaucratic hurdles, lack of good governance, corruption, poor infrastructure, militancy and overall poor law and order situation and continuing confrontation at the borders. The recent incident of abduction and killing of a Pakistani police official in Afghanistan is a reminder that the country is not safe for foreign investors. The fall of foreign exchange reserves to very low levels could also scare away foreign investors. While such impediments to FDI cannot be removed in a short period, the present PTI government is making all-out efforts to improve the external sector and shore up foreign exchange reserves to avoid default on foreign payment. It has devalued the rupee by a big margin and taken several other measures to increase exports and contain imports. In addition, the Prime Minister and Finance Minister have visited Saudi Arabia and China to seek assistance to tide over the situation. An IMF programme is also being negotiated and, if concluded successfully, could make resources available not only from the Fund but also from other multilateral institutions and ensure the foreign investors that Pakistan would follow a proper reform agenda to stabilise the economy and build enough foreign exchange reserves to pay for its liabilities. Hopefully, government authorities would be able to resolve foreign sector issues in due course of time and attract foreign investors to play a meaningful role in the economy of the country.

(This news/article originally appeared in Business Recorder on November 19th, 2018)

]]>Pakistan has to import over 4m cotton baleshttp://return.pk/2018/11/19/pakistan-has-to-import-over-4m-cotton-bales/
Mon, 19 Nov 2018 06:43:19 +0000http://return.pk/?p=14127ISLAMABAD: Pakistan has to import over 4 million cotton bales that would cost around $1.5 billion, owing to declining production of cotton this season, sources revealed to Business Recorder. Officials said imports of such a large quantity would not only increase the country’s import bill, but also the cost of production. Currently customs duty, additional […]

ISLAMABAD: Pakistan has to import over 4 million cotton bales that would cost around $1.5 billion, owing to declining production of cotton this season, sources revealed to Business Recorder.

Officials said imports of such a large quantity would not only increase the country’s import bill, but also the cost of production. Currently customs duty, additional custom duty and sales tax have been imposed @ 3 percent, 1 percent and 5 percent respectively on the import of cotton.

Pakistan has produced around 10 million bales of cotton on average for the last several years against consumption of over 14 million bales. Additionally, 1 to 1.5 million bales of Extra Long Staple (ELS) cotton per annum is also imported, as this quality is not produced in the country.

Cotton Commissioner Dr Khalid Abdullah said that as of 1st November 7.706 million bales of cotton have arrived against 8.134 million during the same period of last year i.e. a decline of 0.428 million bales -5.26 percentage decline.

Seed cotton in Punjab in the current season declined by 8.3 percent to 4.27 million bales as against 4.658 million bales during the previous season. Seed cotton arrival in Sindh recorded at 3.434 million bales in the current season showing a decrease of 1.2 percent as compared to 3.476 million bales last year.

Most of the farmers in Punjab and Sindh have started cutting their cotton crop and are preparing their lands for sowing of wheat crop, an official told this correspondent and added that the situation is not satisfactory and the production will be very far behind the target.

The Cotton Crop Assessment Committee (CCAC) has revised downward cotton production target by around 25 percent i.e. to 10.847 million bales against the initial target of 14.37 million bales set for the current season 2018-19, after missing the sowing target by over 8 percent.

The official said that the country had missed cotton sowing target by over 8 percent due to extraordinary shortage of water. Cotton was sown on 6.632 million acres against the target of 7.28 million acres.

Sources said that due to increased sugarcane cultivation in the cotton areas, delay in harvest of wheat and shortage of water were factors that contributed to a decline in cotton sowing.

The government fixed cotton area and production target for the year 2018-19 was as follows: Punjab was expected to cover 5.70 million acres and to produce 10 million cotton bales, Sindh had to cover 1.53 million acres and produce 4.2 million cotton bales, Balochistan had to cover 0.074 million acres and produce 0.15 million bales and Khyber Pakhtunkhwa had targeted to sow cotton on 0.005 million acres and produce 0.02 million bales of cotton.

The decline in cotton sowing was recorded in Sindh which is the second major cotton producing province. Sindh has covered 0.973 million acres in the current season against the target of 1.53 million acres and missed the target by around 35 percent. Sindh province produces around 32 mounds of seed cotton per acre compared to 21 mounds in Punjab.

The target for cotton seed sowing for 2018-19 in Punjab was 5.7 million acres and the sowing was on area of 5.65 million acres.

Extraordinary shortage of water during the Kharif season, has badly affected the cotton sowing in early season. However, in Punjab, 99% of sowing target was achieved, whereas in Sindh, only 64% of the target area could be sown.

According to the revised estimates, Punjab is projected to produce 8.077 million bales, Sindh 2.6 million bales, Balochistan 0.150 million bales and Khyber Pakhtunkhwa 0.020 million bales.

Officials said that sugarcane crop has overtaken the cotton rich areas of the province including Rahim Yar Khan, Rajanpur, Muzaffargarh and Lodhran, which is another reason for decline in cotton areas.

Further there is low investment in seed quality in Pakistan and measures need to be taken to give incentives to international companies to invest in Pakistan. Due to uncertified cotton seeds production is being affected every year.

During a presentation given to Advisor to Prime Minister on Commerce, Textile Industry and investment Razzak Dawood, textile division listed several reasons for not achieving the targets which include lack of skills development, infrastructure, product and market diversification, compliance, cotton standards, cluster development, cost of doing business & ease of doing business, combined effluent treatment plant, revitalization of textile and garment cities, unnecessary import of textile goods, increase in cotton yield and production of long staple cotton, SME development, pending liabilities, tariff rationalization and regulatory regime.

Textile division has proposed very ambitious plans including introduction of latest seed technology, improving cotton staple length, up-gradation of ginning machinery, cotton standardization, introduction of hedge trading, research and development grant fund for new and existing markets, introduction of new fibers, new products and new blends.

(This news/article originally appeared in Business Recorder on November 19th, 2018)

]]>Doing good while making money: the opportunity in clean technologyhttp://return.pk/2018/11/19/doing-good-while-making-money/
Mon, 19 Nov 2018 06:36:54 +0000http://return.pk/?p=14124WHILE Pakistan ranks relatively low in the world in terms of greenhouse gas emissions and fossil fuel consumption, the country ranks high on indices tracking climate change risks. Renewable energy and climate-friendly businesses meanwhile are ready for enterprising entrepreneurs to take advantage of. According to Germanwatch’s Global Climate Risk Index, Pakistan ranks seventh on the […]

WHILE Pakistan ranks relatively low in the world in terms of greenhouse gas emissions and fossil fuel consumption, the country ranks high on indices tracking climate change risks. Renewable energy and climate-friendly businesses meanwhile are ready for enterprising entrepreneurs to take advantage of.

According to Germanwatch’s Global Climate Risk Index, Pakistan ranks seventh on the list of 10 most affected countries for long-term climate change risk, while the Asian Development Bank states ‘Pakistan’s projected temperature increase is expected to be higher than the global average and major crop yields such as of wheat and rice are expected to decrease significantly with water availability per capita decreasing to an alarming level.’

Simultaneously renewable energy is purported to have entered the mainstream. With renewable reaching price and performance parity and cities integrating renewable in their city plans — moving towards smart cities — the scope of the sector appears boundless.

‘My personal motto is do good, have fun, make money. And I don’t think those three things are in conflict,’ says Fred Walti

Global clean energy investment was $333.5 billion in 2017, up three per cent from 2016 and the second highest annual figure ever, according to Bloomberg, with Asia emerging as the largest-investing region.

A Deloitte Insights report notes: “These trends will likely continue to strengthen… The deployment of new technologies will help further decrease costs and improve integration.”

“Emerging countries that have a burgeoning middle class have a greater need to generate electricity and we have to find a way to make sure they find a sustainable way to do so. To some degree it’s not a political issue, it’s a business issue. Money talks; there is a lot of opportunity in clean technologies and global sustainability around the world,” says Fred Walti. “The question for governments is, are they going to buy it or are they going to build it?”

Mr Walti is the founding CEO of Los Angeles Cleantech Incubator and now the CEO of the Network for Global Innovation. The Network is ‘a collaboration of entrepreneurs and other innovators driven by a common mission to slow climate change and build economic wealth at the same time.’

The necessity lies in not just governments, but entrepreneurs as well, understanding the business opportunity present in entering the clean energy sector.

“I will suggest that if you are going into business pick one that is going to grow for the rest of your life. The solar and wind business has been growing by somewhere between 25 to 35pc for the last five to seven years. From an economic point of view the more sustainable technologies can compete the more it will be natural for the government or cities to use them.”

“My personal motto is do good, have fun, make money. And I don’t think those three things are in conflict. Why shouldn’t you make money if you are doing something good? That will be the most lucrative part.”

But the question is, is the market ready for innovative, climate-friendly products? What if it’s too soon for the market to accept radical business ideas that do good and break the mould?

“You can’t force markets but sometimes change forces established industries to become more competitive,” he says, giving the example of Airbnb. An online hospitality service, Airbnb has revolutionised the lodging market by keeping hotel rates in check and making additional rooms available during peak periods.

“I’m not saying it’s easy. I’m called a ‘serial entrepreneur’. That means I’ve tried to build 12 companies beginning when I was around 18. Of those 12 companies only one of them made a lot of money. So, one out of 12 is my track record.”

“When I started, people questioned everything. I was once asked by universal studios to help them develop a plan for this interactive internet stuff. I presented a plan stating I believed it would be a $5bn business in five years. I was practically laughed out of the room.

“Well guess what. Google today, Just Google, makes a hundred million dollars in advertising every day. So in a week they make more than what I was predicting. Now that’s a big opportunity. I think what you have to do is focus on what your passion is. What you’re good at. Then the money part will come. It’s not ‘make money, have fun, do good’, that’s not the order.

“But don’t plan on your first idea working out because it probably won’t. That doesn’t mean you shouldn’t do it because you’ll learn a lot. I learnt as much on my way down as I did on my way up. Because you don’t just let your company fail, you fight every day to keep it running. That teaches you about things that you wouldn’t learn otherwise.”

Published in Dawn, The Business and Finance Weekly, November 19th, 2018

]]>Rising corporate profitabilityhttp://return.pk/2018/11/19/rising-corporate-profitability/
Mon, 19 Nov 2018 06:31:42 +0000http://return.pk/?p=14121CORPORATE profitability was on the rise these past nine-months (Jan-Sept 2018) as revealed by the just concluded autumn financial results reporting season. The profit after tax (PAT) clocked in by 96 of the 100 companies that comprise the KSE-100 Index amounted to Rs480.4 billion showing collective growth of around 7.8 per cent over net profit […]

CORPORATE profitability was on the rise these past nine-months (Jan-Sept 2018) as revealed by the just concluded autumn financial results reporting season.

The profit after tax (PAT) clocked in by 96 of the 100 companies that comprise the KSE-100 Index amounted to Rs480.4 billion showing collective growth of around 7.8 per cent over net profit of Rs445.5bn earned in the corresponding period of the previous year.

Fertiliser companies were ahead of the rest with earnings showing an impressive surge of 90pc to Rs54bn over PAT amounting to Rs28bn earned in 9MCY17. Other profitable sectors were way behind. Oil and gas exploration companies could shore up earnings by 27pc to Rs130.8bn from Rs103.1bn followed by chemical sector earnings up 19pc and Power Generation and Distribution bottom line boosted by 14pc.

On the flip side, major erosion in overall earnings for the nine-month period was witnessed in the banking sector with earnings down 10pc to Rs113.8bn, from Rs126.8bn year-on-year. The poorer earnings of the banking sector spoilt the profitability of the entire corporate sector since commercial banks now command the highest weight of 24.6pc in the KSE-100 Index.

As long as corporates keep making profits, investors can bank upon the boards to pass on benefits to restore investors’ confidence in the equity market

The decline in earnings of the banking sector was attributable to Habib Bank Limited’s New York settlement payments and adjusted pension costs of large banks. The decrease also represented hefty provisioning expenses booked by certain banks and lower capital gains.

Auto assemblers also posted dismal net earnings for 9MCY18 that declined by nine per cent to Rs23.6bn from Rs26.6bn. A sector analyst said: “Amid an unfavourable environment for autos including weaker rupee, rising inflation and interest rates, the influx of new competition could make the situation more challenging for the existing Original Equipment Manufacturers going forward”.

For the 9MCY18, Oil and Gas Marketing Companies aggregate earnings also dropped nine per cent to Rs19.0bn, from Rs20.9bn. After tax profit of the cement sector stood shaded by eight per cent to Rs33.0bn, from Rs35.7bn year-on-year.

Analysts at brokerage Arif Habib Limited worked out the performance of low weighted sector separately where the collective profit earned by the textile spinning sector increased by a whopping 169pc; followed by leasing sector earnings which jumped up by 89pc; Insurance profits higher by 35pc; Paper and board profit increase by 27pc and that of Food sector reflecting a 16pc glossier bottom line for the latest nine months against the same period in 2017.

Analysts worked feverishly on their calculators to work out the best and the worst performing sectors during the third-quarter (July-Sept) for most fund managers tend to allocate fresh funds on the merits of the latest quarter.

Profitability of the corporate sector for the 3QCY18 increased marginally by 0.8pc over the same time last year, the tiny growth driven by a profit upsurge of 39pc in the oil exploration and production (E&P) sector and by 53pc in the fertiliser sector.

Of particular interest going forward would be the textile sector as the country needs to accelerate exports to alleviate the growing trade deficit. To facilitate the sector, the government has allowed subsidised gas rate for five zero-rated export oriented sectors with effect from Sept 27.

With regard to the cement sector, Elixir Securities noted that dispatches could remain modest going forward owing to a slowdown in the economy; cut in the PSDP after entry into the International Monetary Fund programme and drop in construction activities amidst rising interest rates (ie Home financing).

Pressure on cement prices might be seen in the North due to upcoming expansions while sticky coal prices on the higher side also remain a key concern for the sector. Flat domestic offtake growth was anticipated in FY2019. Fast moving consumer goods (FMCGs) companies could benefit by the ability and willingness of consumers to pay more.

Senior analyst at brokerage Topline Securities said that the profitability of the corporate sector grew at a slower pace in 2018, after several years of impressive earnings upsurge. They attributed it to several factors including the depreciation in the value of the rupee; political and economic uncertainty and rising interest rates.

The overall profit growth for the corporate sector in 9MCY18 corresponded with a break in the losing spree at the stock market.

During the nine months under review, KSE-100 Index gained 521 points (1.3pc) with the bull run led by Fertiliser stocks that contributed 926 points to the Index rise followed by banks adding 712 points and E&P clocking in 366 points. The laggards were cement stocks taking away 360 points and automobile assembler shares scrapping 341 points from the Index.

Pragmatists nonetheless, caution that good times may not roll on forever in the face of mounting inflation, escalating price of gas and power and increasing interest rates.

On the flip side, the decline in international oil prices by 25pc since hitting a multi-year high of $86 on Oct 03, bodes well for the economy. More positives for the economy that could translate to corporate earnings growth are shaping up.

Alfalah Securities in a recent report reminded that the $6bn support package from Saudi Arabia takes care of about half of the countries FY19 net financing gap. “Along with the IMF programme to implement reforms (and Chinese financial assistance package), it might control fiscal slippage and kick start economic rejuvenation.”

The next quarter results would show if the companies’ earnings streams are drying up. But as long as corporates keep making profits, investors can bank upon the boards to pass on benefits to shareholders in dividends and restore investors’ confidence in the equity market.

Published in Dawn, The Business and Finance Weekly, November 19th, 2018

]]>Punjab to plug losses with ‘Master Water Plan’http://return.pk/2018/11/19/punjab-to-plug-losses-with-master-water-plan/
Mon, 19 Nov 2018 06:28:39 +0000http://return.pk/?p=14117WITH a Pakistan’s population growing at a rate of around 2.6 per cent and projected to reach 300 million by 2050, Punjab — the most populous federating unit of the country — may soon face serious water availability and quality challenges. To meet the challenges the steps taken so far have focused only on the […]

WITH a Pakistan’s population growing at a rate of around 2.6 per cent and projected to reach 300 million by 2050, Punjab — the most populous federating unit of the country — may soon face serious water availability and quality challenges.

To meet the challenges the steps taken so far have focused only on the supply side, ignoring population control measures and changing attitudes of the people towards efficient use and conservation of water.

The replacement cost of the province’s irrigation system is more than $25 billion. Ironically, utilisation-wise it is also one of the most inefficient systems as 50pc of the water that flows down its canals is lost before it reaches agricultural fields in their respective command areas.

In other words, out of the 104 million acre feet (MAF) of water Punjab receives as its share, only around 55MAF reach farmers, with those at the head of a distributary getting a greater share than the tail-enders.

‘Right now, when the farmer is unable to pay the rational cost of canal water and the government itself is deficient in financial resources, expecting us to introduce and promote efficient watering systems is like living in a fool’s paradise,’ says Mr Leghari

Dr Erum Khalid Sattar, who teaches Water Rights and Resources at Elisabeth Haub School of Law, is critical of the inefficient use of water.

Stressing on more crops for each drop of water, she tells participants of a seminar here that with just 10MAF water from the Colorado river, which encompasses seven US and two Mexican states, an economy worth $1.5 trillion has been built while Punjab, with 104MAF is generating only a fraction of that amount.

Admitting water sector inefficiencies, provincial authorities say they are engaged in preparing a ‘Master Water Plan’, backed by legal cover, which encompasses regulation of abstraction of water and disposal of waste water in both urban and rural areas.

Neither of the two tasks will be allowed, either by an individual or anentity, without them getting registered with the authority concerned and obtaining a duration-specific licence coupled with certain other conditions.

The draft document reveals that various sub-sectors like domestic, agricultural, industrial and ecological, will be allocated a certain share of the commodity, while a regulatory authority will be formed to oversee performance of the entities engaged with the supply of water and/or disposal of sewage. Appointment of undertakers for water and sewage services has also been suggested.

The plan proposes setting up a Water Resources Commission under the Irrigation Department, Water Services Regulatory Authority under the Housing and Public Health Department (HPHD) and undertakers under the joint control of respective local government and HPHD.

Punjab Irrigation Minister Mohsin Leghari says the plan will also deal with the supply side as workable suggestions for harvesting rainwater and hill torrents from the Sulaiman Ranges will also be made part of it.

However, the strategy lacks any proposal for rationalising water charges or abiana, which have been fixed at a flat rate since 2003-04. There are also no steps for changing the farming pattern to promote crops that need less water and introducing efficient irrigation systems.

A 2012 study by the Planning Commission says that with the existing abiana rate (Rs85 per acre for Kharif and Rs50 per acre for Rabi crops) Punjab recovers only 20pc of the operation and maintenance cost of the irrigation system. The government has had to pay for the rest to keep the canal system functional.

Minister Leghari admits that water pricing needs to be rationalised at least to the extent that it can meet the full cost of maintenance. He admits that while higher prices will influence water use behaviour, owing to the fear of political backlash the issue will not be raised, at least for the time being.

The draft Master Plan also overlooks the large-scale promotion of high-efficiency irrigation systems like drip irrigation and sprinklers for want of funds.

Mr Leghari candidly admits that the government will get a “breathing space” only next year as during the ongoing financial year they’ve just enough funds to meet infrastructure and other project needs of projects initiated by the previous government.

“You know that high-efficiency irrigation, such as the the drip system, involves huge investment. Right now, when our farmer is not able, or at least ready, to pay the rational cost of canal water and the government itself is deficient in financial resources, expecting us to introduce and promote efficient watering systems is like living in a fool’s paradise.”

Zoning of crops will, however, be done with the cooperation of the agriculture department with some incentives so that farmers may be attracted towards high-value but drought-tolerant crops and shunned away from sowing certain crops that are planted over and above the national need, he adds.

Published in Dawn, The Business and Finance Weekly, November 19th, 2018

]]>ECC to allow wheat export tomorrowhttp://return.pk/2018/11/19/ecc-to-allow-wheat-export-tomorrow/
Mon, 19 Nov 2018 06:25:27 +0000http://return.pk/?p=14114ISLAMABAD: The government has called a meeting of the Economic Coordination Committee (ECC) of the cabinet on Tuesday to allow export of wheat for earning some foreign exchange and disbursement of about Rs1.6bn to Pakistan Steel Mills (PSM) for settlement of minuscule gratuity and provident fund liabilities. To be presided over by Finance Minister Asad […]

ISLAMABAD: The government has called a meeting of the Economic Coordination Committee (ECC) of the cabinet on Tuesday to allow export of wheat for earning some foreign exchange and disbursement of about Rs1.6bn to Pakistan Steel Mills (PSM) for settlement of minuscule gratuity and provident fund liabilities.

To be presided over by Finance Minister Asad Umar, the meeting is also expected to grant exemption from re-lending policy of the government for funds to be provided as grant to the Pakistan Poverty Alleviation Fund (PPAF) and consider a report on sugarcane price and cost of production of sugar.

Sources said the ECC had in a recent meeting advised prime minister’s adviser on commerce, industries and production Abdul Razak Dawood to work out a plan for export of surplus wheat to boost the country’s declining foreign exchange reserves and free up storage.

PSM to get Rs1.6bn for settlement of gratuity, provident fund liabilities

The sources said Mr Dawood had held discussions with all the agencies concerned and concluded that substantial surplus wheat stocks were available in the public sector — both with provincial governments and the Pakistan Agricultural Storage and Services Corporation — that were creating storage problems and causing hardship to the farming community because of financial constraints. Therefore, the proposal for export will help boost foreign exchange reserves, reduce storage cost and ease financial problems of farmers.

The sources said a summary would be presented to the ECC seeking export of public sector stocks. The quantities and export mechanism would be determined in the summary that has not yet been circulated to the ministries concerned as required under the rules of business.

The government has already announced increasing wheat support price by Rs50 per 40kg to Rs1,350 in view of complaints that bumper crop last year did not yield early payments and hence good results to the farmers which could discourage them next year.

There are indications that the government may allow the export over one million tonnes of wheat with more than $100 per tonne subsidy.

The sources said the ECC was also expected to approve disbursement of Rs1.6bn provident and gratuity liabilities to deceased employees of PSM even though total liabilities on these two fronts had been estimated at Rs67bn, including Rs52bn provident fund and Rs15bn gratuity.

Another Rs8bn is payable to dealers, suppliers and contractors of PSM, besides huge sums of the National Bank of Pakistan and Sui Southern Gas Company Limited which have already approached the high court for recovery of dues as the company’s total losses and liabilities exceed Rs470bn, including about Rs13bn accrued during the tenure of the present government. The government has not been able to consider a plan for revival of the PSM in three months in office even though it has decided not to privatise it.

In the proposal for payment of gratuity and provident fund to families of the deceased employees after a recent ECC meeting, an additional secretary of the industries ministry holding the additional charge of chief executive of PSM was directed to visit the mill following humanitarian calls from some families.

The acting CEO along with the PSM ad hoc management visited the mill and had meetings with some representatives of the retired and serving employees, besides a marathon session with top management of Hub Power Company.

The ECC is also expected to give exemption from the re-lending policy of the government for funds to the PPAF as grant. Under the existing uniform re-lending policy, the government secures cheap funding for public sector organisations, including non-profit organisations, and re-lends them at 12-14pc mark-up. Given PPAF’s role in social protection, it is always given exemption to ensure cheaper grants to it without building mark-up.

]]>Cost cuts in mediahttp://return.pk/2018/11/19/cost-cuts-in-media/
Mon, 19 Nov 2018 06:22:41 +0000http://return.pk/?p=14111ONE 24/7 news television channel has shut down. Many other news channels, big and small, are teetering on the brink: their advertising revenues have been falling for several months. The keyword in the (electronic) media these days is ‘rightsizing’. From camerapersons to producers to programme hosts — everyone’s job is on the line. Bureau offices […]

ONE 24/7 news television channel has shut down. Many other news channels, big and small, are teetering on the brink: their advertising revenues have been falling for several months.

The keyword in the (electronic) media these days is ‘rightsizing’. From camerapersons to producers to programme hosts — everyone’s job is on the line. Bureau offices have been particularly vulnerable to the campaign to cut expenses with many shutting down, rendering hundreds without work.

The devastation caused by plunging government and commercial advertising is real and substantial, and not limited to news TV networks alone. After all those doomsday predictions made ever since the birth of free electronic media some two decades ago, the bubble, it appears, has finally burst.

TV channels were always destined for some correction, meaning that some of them were supposed to fizzle out post-boom, only the fittest among them surviving. But the crisis is not limited to the channels, of which the experts say Pakistan has too many.

The newspaper industry has its own demons to overcome. Watching resignedly as companies took a substantial portion of their media spend from their print to their digital platforms to reach out to their target markets, the good old trusted newspaper is faced with a mortal threat as incomes fall drastically.

Thus starved of resources, newspapers and magazines have shed pages and created redundancies of their own. Some are finding it hard to pay salaries to their retained employees, contributing to the unrest and the increasingly vocal protest among journalists and other workers in the industry.

Here, too, media accounts do not match. Job loss estimates in television and newspapers vary from one industry source to another. Afzal Butt, president of his faction of the Pakistan Federal Union of Journalists (PFUJ), puts the number of employees who have lost their jobs in this latest wave somewhere between 300 and 500. He fears more bad news over the next several months if the “bleeding doesn’t stop”.

‘The government has cut its media spend by more than 70 per cent and companies by almost 50pc’, says a leading advertising agency owner

Much has been said about how the current crisis is linked with the ascent to the throne of Prime Minister Imran Khan, who emerged on top in the midst of a badly polarised media. However, some sombre, less emotional versions say the difficulties predate Prime Minister Khan.

What has happened is that the government decision to sharply slash media spend and its refusal to clear outstanding payments to TV channels and newspapers, on account of advertisements released by the previous PML-N administration, intensified the trouble.

Information Minister Chaudhry Fawad Hussain promised last week to clear the unpaid bills of the media houses to protect jobs, but it is not yet clear if the provincial governments also plan to make the outstanding payments to help ease financial pressures facing television networks, newspapers and magazines.

A leading advertising agency owner told this correspondent in Lahore that the government has cut its media spend by more than 70 per cent and companies by almost 50pc, agreeing with the minister that the previous government had been ‘very generous’ in financially supporting media organisations through its publicity campaigns.

“The government’s media spend started falling soon after the installation of the caretaker governments in Islamabad and the provinces in the run-up to the July elections. Commercial advertisers began cutting their expense on media campaigns soon after the new government came into power because of tax and economic policy uncertainty,” he says, requesting anonymity because of his business relations with the federal and Punjab governments.

Indeed, the federal and provincial governments, especially of Punjab and Sindh, have in recent years heavily spent their way into the list of top 10 print media advertisers along with commercial banks, telcos, real estate developers, FMCG firms, food companies, etc.

Industry sources claim that advertising spend of both federal and provincial governments contributed the lion’s share to the incomes of TV channels in the last few years, but its exact size is difficult to calculate.

“The government has actually subsidised news channels for several years by buying air time at a much higher rate — around three times higher than the rate charged by the channels from a private company for the same duration and slot. The majority of the channels are facing the present financial crunch because their revenues from government advertisements have suddenly vanished,” says a senior executive of another major advertising agency from Karachi, refusing to reveal his identity.

The total advertising spend is ‘assumed’ to have grown at a reasonable rate over the last few years but the market remains significantly small given the number of media sources claiming their share from the pie.

Aurora, a Dawn Media Group publication on marketing, which annually compiles advertising spend collected from multiple sources, estimates that the market size has grown by a little less than a third from Rs66.9 billion in FY2015 to Rs87.7bn in FY2017, with almost half of the total revenues flowing in the way of TV channels and less than a quarter in the way of newspapers. The rest is divided among radio, Out of Home (OOH), digital formats, etc.

The keyword in the (electronic) media these days is ‘rightsizing’. From camerapersons to producers to programme hosts — everyone’s job is on the line

Some Karachi-based advertising firm executives, however, believe that the combined media spend of government and the private sector has grown to Rs90.5bn during CY2017, not very far from the Aurora estimates. But they insist television’s share in the market stands at 66.4pc compared with the print media share of 10.7pc.

On the basis of their popularity among viewers, the top six channels grabbed 45pc of the total television advertising spend of Rs42bn in FY2017. ARY Digital and Hum TV topped the industry with a 10pc share each followed by Geo News with eight per cent, Geo Entertainment with seven per cent, and Urdu1 and PTV Home with five per cent each. The rest left for scores of other channels to share between them.

Similarly, the top three newspapers captured 47pc of the total print advertising revenue of Rs20bn with Jang topping the list with 26pc share followed by Dawn with 12pc and The Express Tribune with nine per cent.

The information minister accused the previous government of using advertising as a ‘political tool’, saying the PTI administration will “bring a balance” in the (news) industry through a transparent, merit-based policy for future distribution of the government’s media campaigns. He has repeatedly said the government wasn’t interested in bailing out media outlets with taxpayers’ money.

Many news industry analysts argue that if the PML-N used government advertising to ‘bribe’ channels and newspapers, the PTI is employing the same tool to muzzle them.

“In recent months, we’ve seen the state and its different organs bring pressure on media owners… to put them on the mat. Public sector advertisement that contributes 22-23pc to the total media revenue is being used to impose the government’s own agenda on the media,” asserts Adnan Rehmat, an Islamabad-based media analyst.

“The proposal to replace the existing separate electronic and print regulators with a new body, Pakistan Media Regulatory Authority (PMRA), to regulate print, electronic and social media without consulting the owners and journalists is an attempt to control the content (produced by the news media). The pitch is being laid against the content producers,” he argues.

Seemi Naghmana, a professor of mass communication at the University of Karachi, agrees with him. But she says the present crisis was long overdue because of mushroom growth in the television industry.

“We’re still watching new TV channels being launched in spite of the financial crunch gripping the industry. Our economy isn’t strong enough to support such mushroom growth of TV channels. So when the crunch came in the wake of cuts in government advertisement, many started retrenching their employees to hedge against potential losses,” she elaborates.

A Karachi-based senior journalist blames media consumers for their unwillingness to pay for the content produced by the television they watch, and newspapers and magazines they read.

“Because media consumers aren’t ready to pay for the content, the owners have built organisations that mainly depend on government and commercial advertisement revenue for sustenance. Reliance on the government increases when the economy is not performing. This is a fragile business model. Little wonder if governments take advantage of this fragility to control the content produced and gag free expression,” he explains.

Whatever little fee consumers pay to watch more than 100 channels at home goes to the distributors instead of content producers. Similarly, up to 40pc of the cost of a newspaper is pocketed by hawkers-distributors and another 10-20pc is lost in bad debts and unrecovered costs. While the television industry gets nothing from distributors, newspapers recover only a small fraction of their cost from sales.

Further, there is a general agreement among media professionals that the rise of internet and emergence of new means for advertisers to reach their target audience has diverted advertisement from the conventional TV and print media. The size of the advertising spend has increased over the years, but so has the number of claimants. The competition for advertising income has increased sharply.

“Many competing channels and newspapers are ready to become an extension of government propaganda,” says the Karachi-based journalist. “And these media houses are ready to do the bidding of businesses prepared to pay for the content of [these businesses’] liking to protect and increase their market share.”

Some principles it seems remain unchanged, even when the ‘turmoil’ has taken away many jobs and left everyone else in the media insecure.

Representatives of the Pakistan Broadcasters Association and the All Pakistan Newspapers Society were not available for comment.

Published in Dawn, The Business and Finance Weekly, November 19th, 2018

]]>Let PayPal come to Pakistanhttp://return.pk/2018/11/19/let-paypal-come-to-pakistan/
Mon, 19 Nov 2018 06:19:28 +0000http://return.pk/?p=14108THERE has been a repeated demand from freelancers and e-commerce players to bring PayPal to Pakistan. Finance Minister Asad Umar has also shown commitment to facilitating its arrival. There is also a demand that we should set up our own PayPal-like payment gateway. First, let’s look at some of the reasons why freelancers and e-commerce […]

THERE has been a repeated demand from freelancers and e-commerce players to bring PayPal to Pakistan. Finance Minister Asad Umar has also shown commitment to facilitating its arrival. There is also a demand that we should set up our own PayPal-like payment gateway.

First, let’s look at some of the reasons why freelancers and e-commerce players want PayPal or a similar platform to come to Pakistan. We will later discuss whether we need PayPal or a local payment platform can solve our problems.

Why PayPal matters

Pakistan is the fourth largest freelancer community in the world. As per the estimates of Payoneer, Pakistani freelancers bring about $1 billion to Pakistan via other sources.

Most of these platforms charge a fee between five per cent and 30pc. Having access to PayPal allows freelancers to ask their customers to send money via this platform, which costs them only 2.5pc. PayPal allows sending the invoice directly to the customer or easy integration in the website within two minutes.

Customers trust PayPal because it offers quick dispute resolution. They know they can file a request with PayPal if the service provider fails to deliver

There are also companies that sell subscription software like $10 a month or $80 a month. Platforms like PayPal offer easy recurring payment setups. Customers feel safe in allowing such platforms to store their credit card and keep charging them every month.

Customers also trust PayPal because it offers an easy dispute mechanism. They know they can file an easy dispute with PayPal if the service provider fails to deliver.

There are payment gateways available for freelancers from banks in Pakistan. However, the process to get such a payment gateway is not straightforward compared to international gateways. Freelancers are not interested in integrating them as the process is often very difficult.

International e-commerce players

E-commerce has a huge potential for Pakistani companies, including those in Sialkot and Faisalabad. They can establish their brands online and sell internationally. Local players don’t need PayPal as most customers don’t know about it. However, international customers trust PayPal. Research shows that having PayPal or an e-commerce website can increase sales by up to 50pc because of the trust factor.

There are many e-commerce players that get inventory from China for their products. Using a Pakistani payment gateway doesn’t work for them because the process of converting money to the rupee at a lower rate and then sending it to China is very slow.

These companies also use Facebook and Google ads to advertise their products, which are taxed heavily in Pakistan. So they keep their money outside instead of bringing it to Pakistan. This is costing Pakistan dearly and keeping these players outside of our taxation system.

Do we need PayPal?

With PayPal, we get more business because of the trust factor. As a country, we should enable our entrepreneurs to do business globally. Allowing PayPal or making it easy for such platforms will help us get out of the way of entrepreneurs.

Whoever has an option to set up a company abroad or use the accounts of their aunts and uncles prefers to open a PayPal or similar company’s account internationally.

They prefer PayPal because they feel they are being squashed by first getting a lower exchange rate and then paying a higher one to pay Google, Facebook and their suppliers in China or elsewhere. We should enable PayPal and other international players like Stripe to easily come and expand here.

Will PayPal come?

PayPal has issues with the Financial Action Task Force (FATF). We also have $2.5 million State Bank of Pakistan (SBP) fee, which makes it a total no-go area for companies like Freelancer. The fee can be removed as a first step.

It might still be difficult for PayPal to come to Pakistan due to the risks of fraud and money laundering. There are countries such as Costa Rica that have set up risk funds as collateral for companies like PayPal. Having such funds can decrease the risk for these companies.

Case for a local payment platform

There is a huge need for enabling our own companies to build platforms like PayPal. The SBP licence fee of $2.5m simply discourages any innovation that is required in this space. There are various reasons why having a local platform will help us greatly.

One, money will be retained locally. This is one of the biggest reasons. Money from Freelancer or other e-commerce players will be kept locally. This has to be allowed in both dollars and rupees. Otherwise, there will be minimal adoption by players. Getting the rupee at a lower rate and then paying a higher rate to buy services abroad or even get taxed at 4-5pc doesn’t make sense for them.

Money will be converted to the rupee as soon as the account holder transfers it to their bank account. This will keep the SBP happy as well.

Two, it will help boost local e-commerce players. Having a good dispute mechanism will increase the trust of local Pakistani e-commerce players. This will build the trust of the e-commerce store for online transactions.

Three, it will save us from the Visa and MasterCard processing fees. MasterCard and Visa get a cut for every transaction that happens online involving the transfer of money from one account to another on the same platform. We can move towards eliminating these platforms from our payment system. China has successfully done it. Although we may not be able to do it at the scale of China, documenting the economy will help us greatly.

Conclusion

Pakistan urgently needs to enable its entrepreneurs to accept payments via platforms like PayPal, Stripe and local payment gateways. As we convince PayPal to come to Pakistan, we should strengthen our local payment platforms that allow our freelancers and e-commerce players to easily accept international payments.

Published in Dawn, The Business and Finance Weekly, November 19th, 2018